2019 Ruling 2018-0789981R3 - 55(3)(a) Reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the reorganization meets the requirements of paragraph 55(3)(a).

Position: Yes.

Reasons: Meets legislative requirements.

XXXXXXXXXX							2018-078998

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX (herein referred to as the “Taxpayers”)

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted Taxpayers.

This letter is based solely on the Facts, Proposed Transactions, Additional Information and Purposes of the Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions or Additional Information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of each of the Taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed tax return of the Taxpayers or any person related to the Taxpayers and;

(i) being considered by the CRA in connection with such return;

(ii) under objection by the Taxpayers or any person related to the Taxpayers;

(b) the subject of a current or completed court process involving the Taxpayers or any person related to the Taxpayers; and

(c) the subject of a ruling Request previously considered by the Income Tax Rulings Directorate.

Unless otherwise noted, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

“ACB” means “adjusted cost base” as that term is defined in section 54;

“Act” means the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended to the date of this letter and, unless otherwise indicated, all statutory references in this letter are to the Act;

“agreed amount” means the amount agreed on by the transferor and transferee in respect of a transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

“BCA” means the XXXXXXXXXX;

“BN” means business number;

“capital property” has the meaning assigned by section 54;

“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);

“Child 1” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act. Child 1 is the child of Parent A and Parent B and the sibling of Child 2 and Child 3;

“Child 1 Trust” means XXXXXXXXXX, a discretionary family trust for Child 1’s family that is resident in Canada for the purposes of the Act. The beneficiaries of the Child 1 Trust are Child 1, Child 1’s spouse, their children and grandchildren. Child 1 is the trustee of the Child 1 Trust;

“Child 2” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act. Child 2 is the child of Parent A and Parent B and the sibling of Child 1 and Child 3;

“Child 2 Trust” means XXXXXXXXXX, a discretionary family trust for Child 2’s family that is resident in Canada for the purposes of the Act. The beneficiaries of the Child 2 Trust are Child 2, Child 2’s spouse and their children. Child 2, his spouse and his business partner are the trustees of the Child 2 Trust;

“Child 3” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act. Child 3 is the child of Parent A and Parent B and the sibling of Child 1 and Child 2;

“Childco 1” refers to XXXXXXXXXX a corporation incorporated under BCA;

“Childco 2” refers to XXXXXXXXXX., a corporation incorporated under BCA;

“Childco 3” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning assigned by subsection 248(1);

“dividend refund” has the meaning assigned by subsection 129(1);

“eligible property” has the meaning assigned by subsection 85(1.1);

“ERDTOH” means “eligible refundable dividend tax on hand” as that term is defined in subsection 129(4);

“Farm Partnership” refers to XXXXXXXXXX, a Canadian general partnership established on XXXXXXXXXX;

“Farmco 1” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Farmco 2” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“FMV” means “fair market value,” which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length and under no compulsion to act, and contracting for a taxable purchase and sale, expressed in terms of cash;

“Holdco A” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Holdco B” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Holdco 1” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Investco 1” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Investco 2” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“Investco 3” refers to XXXXXXXXXX, a corporation incorporated under BCA;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that term is defined in subsection 129(4);

“Paragraph” means a numbered or lettered paragraph of this letter;

“Parent A” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

“Parent B” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

“Parent Family Trust” means XXXXXXXXXX, a discretionary family trust for the family of Parent A and Parent B that is resident in Canada for the purposes of the Act. Parent A and Parent B are the trustees of the Parent Family Trust. The beneficiaries of the Parent Family Trust are Parent A, Parent B, as well as their children, grandchildren and great-grandchildren;

“proceeds of disposition” has the meaning assigned by section 54;

“Promissory Note 1” means the non-interest bearing promissory note issued by Farmco 1 to Holdco A in the amount of $XXXXXXXXXX, as described in Paragraph 23;

“Promissory Note 2” means the non-interest bearing promissory note issued by Farmco 1 to Holdco B in the amount of $XXXXXXXXXX, as described in Paragraph 24;

“Promissory Note 3” means the non-interest bearing promissory note issued by Holdco A to Farmco 1 in the amount of $XXXXXXXXXX, as described in Paragraph 25;

“Promissory Note 4” means the non-interest bearing promissory note issued by Holdco B to Farmco 1 in the amount of $XXXXXXXXXX, as described in Paragraph 26;

“Promissory Note 5” means the non-interest bearing promissory note issued by Farmco 2 to Holdco A in the amount of $XXXXXXXXXX, as described in Paragraph 27;

“Promissory Note 6” means the non-interest bearing promissory note issued by Farmco 2 to Holdco B in the amount of $XXXXXXXXXX, as described in Paragraph 28;

“Promissory Note 7” means the non-interest bearing promissory note issued by Holdco A to Farmco 2 in the amount of $XXXXXXXXXX, as described in Paragraph 29;

“Promissory Note 8” means the non-interest bearing promissory note issued by Holdco B to Farmco 2 in the amount of $XXXXXXXXXX, as described in Paragraph 30;

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;

“PUC” means “paid-up capital” as that term is defined in subsection 89(1);

“RDTOH” means “refundable dividend tax on hand” as that term is defined in subsection 129(3);

“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), and where applicable, as modified for the purposes of section 55 by paragraph 55(5)(e);

“SIN” means social insurance number;

“specified financial institution” has the meaning assigned by subsection 248(1);

“restricted financial institution” has the meaning assigned by subsection 248(1);

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“taxable preferred share” has the meaning assigned by subsection 248(1); and

“taxation year” has the meaning assigned by subsection 249(1).

FACTS

1. Farm Partnership carries on the business of XXXXXXXXXX farming in the Province of XXXXXXXXXX. The partnership is comprised of XXXXXXXXXX partners which include Childco 3, Childco 1, Farmco 1, Farmco 2, and Childco 2. XXXXXXXXXX.

2. Farmco 1 is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Farmco 1 are Parent A and Parent B who are spouses. Parent A owns XXXXXXXXXX Class B common shares and XXXXXXXXXX Class F preferred shares. Parent B owns XXXXXXXXXX Class A common shares and XXXXXXXXXX Class F preferred shares. The common shares carry voting rights (XXXXXXXXXX per share), while the Class F preferred shares are non-voting, redeemable and retractable shares. Parent A and Parent B jointly control Farmco 1. Farmco 1 owns XXXXXXXXXX. Farmco 1 also owns some investments.

3. Childco 3 is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Childco 3 are Investco 3 and Child 3. Investco 3 owns XXXXXXXXXX of Childco 3 and Child 3 owns XXXXXXXXXX Class A common shares, XXXXXXXXXX Class B common shares and XXXXXXXXXX Class F preferred shares of Childco 3. The Class A and Class B common shares carry voting rights (XXXXXXXXXX per share) while the Class C common shares are non-voting. The Class F preferred shares are non-voting, redeemable and retractable shares. Child 3 controls Childco 3 and Investco 3. Childco 3 owns XXXXXXXXXX and also owns some investments.

4. Childco 1 is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Childco 1 are Child 1, Child 1’s spouse, Child 1 Trust, and Investco 1. Child 1 Trust owns XXXXXXXXXX Class A common shares of Childco 1 and Investco 1 owns XXXXXXXXXX of Childco 1. Child 1’s spouse owns XXXXXXXXXX Class H preferred shares of Childco 1 and Child 1 owns XXXXXXXXXX Class H preferred shares of Childco 1. The Class A and Class C common shares carry voting rights (XXXXXXXXXX per share) while the Class H preferred shares are non-voting, redeemable and retractable shares. For purposes of section 55, Child 1 Trust controls Childco 1 and Investco 1. Childco 1 owns XXXXXXXXXX. Childco 1 also owns some investments.

5. Childco 2 is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Childco 2 are Investco 2, Child 2 Trust, Child 2 and Child 2’s spouse. Child 2 Trust owns XXXXXXXXXX Class A common shares of Childco 2 and Investco 2 owns XXXXXXXXXX of Childco 2. Child 2 owns XXXXXXXXXX Class F preferred shares and XXXXXXXXXX Class G preferred shares of Childco 2 and Child 2’s spouse owns XXXXXXXXXX Class F preferred shares of Childco 2. The Class A common shares carry voting rights (XXXXXXXXXX per share) while the Class C common shares are non-voting. The Class G and Class F preferred shares are non-voting, redeemable and retractable shares. For purposes of section 55, Child 2 Trust controls Childco 2 and Investco 2. Childco 2 owns XXXXXXXXXX. Farm Partnership also owns some investments.

6. Farmco 2 is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Farmco 2 are Childco 2, Farmco 1, Childco 1 and Childco 3. Childco 2 owns XXXXXXXXXX Class C common shares and XXXXXXXXXX Class D preferred shares of Farmco 2. Farmco 1 owns XXXXXXXXXX Class C common shares and XXXXXXXXXX Class D preferred shares of Farmco 2. Childco 1 owns XXXXXXXXXX Class C common shares and XXXXXXXXXX Class D preferred shares of Farmco 2. Childco 3 owns XXXXXXXXXX Class C common shares of Farmco 2. The Class C common shares and the Class D preferred shares carry voting rights (XXXXXXXXXX per share). The Class D preferred shares are redeemable and retractable shares.

7. Holdco A is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The sole shareholder of Holdco A is Parent A, who owns XXXXXXXXXX Class A voting common shares. Holdco A’s only asset is the $XXXXXXXXXX it received from Parent A’s original share subscription.

8. Holdco B is a CCPC and a taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The sole shareholder of Holdco B is Parent B, who owns XXXXXXXXXX Class A voting common shares. Holdco B’s only asset is the $XXXXXXXXXX it received from Parent B’s original share subscription.

9. Holdco 1 is a CCPC and taxable Canadian corporation with a taxation year ending on XXXXXXXXXX. The shareholders of Holdco 1 are Parent A, Parent B, and the Parent Family Trust. Parent A owns XXXXXXXXXX Class E preferred shares and Parent B owns XXXXXXXXXX Class E preferred shares of Holdco 1. Parent Family Trust owns XXXXXXXXXX Class A common shares of Holdco 1. The Class A common shares and the Class E preferred shares carry voting rights (XXXXXXXXXX per share). The Class E preferred shares are redeemable and retractable shares. Parent A controls Holdco 1.

10. Holdco 1, Farmco 1, Holdco A, Holdco B, Farmco 2, Childco 3, Childco 1 and Childco 2 are corporations that are related persons. However, for purposes of section 55, Childco 3, Childco 2 and Childco 1 are considered not to be related persons to each other.

11. Each of the individuals who are described in this letter deals with the XXXXXXXXXX Tax Services Office and files his or her returns with the XXXXXXXXXX Taxation Centre. Each of the corporations described in this letter deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Taxation Centre.

12. The shares of all the corporations described above are held by their respective shareholders as capital property.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

First set of Share/Property Transfers

13. Parent A will exchange XXXXXXXXXX Class B common shares of Farmco 1 for XXXXXXXXXX Class F non-voting preferred shares of Farmco 1 having an aggregate redemption amount and FMV equal to the aggregate FMV of Parent A’s XXXXXXXXXX Class B common shares of Farmco 1 so exchanged. Similarly, and on a contemporaneous basis with Parent A’s exchange, Parent B will exchange XXXXXXXXXX Class A common shares for XXXXXXXXXX Class F non-voting preferred shares of Farmco 1 having an aggregate redemption amount and FMV equal to the aggregate FMV of Parent B’s XXXXXXXXXX Class A common shares of Farmco 1 so exchanged.

The amount added to the stated capital in respect of the XXXXXXXXXX Class F preferred shares of Farmco 1 issued to each of Parent A and Parent B will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 51(3).

14. Parent A will transfer XXXXXXXXXX Class F preferred shares of Farmco 1 to Holdco A. As sole consideration for the transfer, Parent A will receive XXXXXXXXXX Class G voting preferred shares of Holdco A, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Class F preferred shares of Farmco 1 so transferred.

Parent A and Holdco A will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to this share transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account of the XXXXXXXXXX Class G voting preferred shares of Holdco A issued to Parent A will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class F preferred shares of Farmco 1 transferred to Holdco A; and (ii) the aggregate ACB to Parent A, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

15. Parent B will transfer XXXXXXXXXX Class F preferred shares to Holdco B. As sole consideration for the transfer Parent B will receive XXXXXXXXXX Class G voting preferred shares of Holdco B, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Class F preferred shares of Farmco 1 so transferred.

Parent B and Holdco B will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the share transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G preferred shares of Holdco B, issued to Parent B, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class F preferred shares of Farmco 1 transferred to Holdco B; and (ii) the aggregate ACB to Parent B, immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

16. Farmco 1 will transfer XXXXXXXXXX, a portion of its partnership interest in Farm Partnership, XXXXXXXXXX Class C voting common shares of Farmco 2 and XXXXXXXXXX Class D voting preferred shares of Farmco 2 to Holdco A. As sole consideration for the transfers, Farmco 1 will receive XXXXXXXXXX Class G-2 voting preferred shares of Holdco A, redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate, which will have an aggregate FMV equal to the aggregate FMV of the property so transferred.

Farmco 1 and Holdco A will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to each of the transfers. For greater certainty, the agreed amount for each property so transferred will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G-2 preferred shares of Holdco A issued to Farmco 1 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

17. Farmco 2 will transfer a portion of its partnership interest in Farm Partnership to Holdco A. As sole consideration for the transfer Farmco 2 will receive XXXXXXXXXX Class G-3 voting preferred shares of Holdco A, redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the FMV of the partnership interest in Farm Partnership so transferred.

Farmco 2 and Holdco A will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G-3 preferred shares of Holdco A issued to Farmco 2 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

18. Farmco 1 will transfer XXXXXXXXXX, a portion of its partnership interest in Farm Partnership, XXXXXXXXXX Class C common shares of Farmco 2 and XXXXXXXXXX Class D preferred shares of Farmco 2 to Holdco B. As sole consideration for the transfers, Farmco 1 will receive XXXXXXXXXX Class G-2 voting preferred shares of Holdco B, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, which will have an aggregate FMV equal to the aggregate FMV of the property so transferred.

Farmco 1 and Holdco B will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to each of the transfers. For greater certainty, the agreed amount for each property so transferred will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G-2 preferred shares of Holdco B issued to Farmco 1 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

19. Farmco 2 will transfer a portion of its partnership interest in Farm Partnership to Holdco B. As sole consideration for the transfer Farmco 2 will receive XXXXXXXXXX Class G-3 voting preferred shares of Holdco B, redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the FMV of the partnership interest in Farm Partnership so transferred.

Farmco 2 and Holdco B will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G-3 preferred shares of Holdco B issued to Farmco 2 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

20. Childco 1 will transfer XXXXXXXXXX Class C common shares of Farmco 2 and XXXXXXXXXX Class D preferred shares of Farmco 2 to Holdco A. As sole consideration for the transfers, Childco 1 will receive XXXXXXXXXX Class K voting preferred shares of Holdco A, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, which will have an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Class C common shares and XXXXXXXXXX Class D preferred shares of Farmco 2 so transferred.

Childco 1 and Holdco A will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the share transfers. For greater certainty, the agreed amount for each of the properties so transferred will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class K voting preferred shares of Holdco A issued to Childco 1 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

21. Childco 2 will transfer XXXXXXXXXX Class C common shares of Farmco 2 and XXXXXXXXXX Class D preferred shares of Farmco 2 to Holdco B. As sole consideration for the transfer, Childco 2 will receive XXXXXXXXXX Class K voting preferred shares of Holdco B, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, which will have an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Class C common shares and XXXXXXXXXX Class D preferred shares of Farmco 2 so transferred.

Childco 2 and Holdco B will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to each of the share transfers. For greater certainty, the agreed amount for each property so transferred will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class K voting preferred shares of Holdco B issued to Childco 2 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

22. Childco 3 will transfer XXXXXXXXXX Class C common shares of Farmco 2 to Farmco 1. As sole consideration for the transfer Childco 3 will receive XXXXXXXXXX Class F voting preferred shares of Farmco 1, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Class C common of Farmco 2 so transferred.

Childco 3 and Farmco 1 will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the share transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class F preferred shares of Farmco 1 issued to Childco 3 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

Deemed Dividends

23. Farmco 1 will redeem the XXXXXXXXXX Class F preferred shares of Farmco 1 that were transferred to Holdco A by Parent A as described in Paragraph 14, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Farmco 1 will issue Promissory Note 1 to Holdco A which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class F preferred shares of Farmco 1 so redeemed and Holdco A will accept Promissory Note 1 as payment in full for the preferred shares so redeemed.

24. Farmco 1 will redeem the XXXXXXXXXX Class F preferred shares of Farmco 1 that were transferred to Holdco B by Parent B as described in Paragraph 15, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Farmco 1 will issue Promissory Note 2 to Holdco B which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the XXXXXXXXXX Class F preferred shares so redeemed and Holdco B will accept Promissory Note 2 as payment in full for the preferred shares so redeemed.

25. Holdco A will redeem the XXXXXXXXXX Class G-2 preferred shares it issued to Farmco 1 as described in Paragraph 16, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Holdco A will issue Promissory Note 3 to Farmco 1 which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the XXXXXXXXXX Class G-2 preferred shares of Holdco A so redeemed. Farmco 1 will accept Promissory Note 3 as payment in full for the preferred shares so redeemed.

26. Holdco B will redeem the XXXXXXXXXX Class G-2 preferred shares it issued to Farmco 1 as described in Paragraph 18, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Holdco B will issue Promissory Note 4 to Farmco 1 which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the XXXXXXXXXX Class G-2 preferred shares of Holdco B so redeemed. Farmco 1 will accept Promissory Note 4 as payment in full for the preferred shares so redeemed.

27. Farmco 2 will purchase for cancellation the XXXXXXXXXX Class C common shares and redeem the XXXXXXXXXX Class D preferred shares of Farmco 2 that were transferred to Holdco A as described in Paragraphs 16 and 20, for an amount equal to their aggregate FMV and/or redemption amount, as the case may be. As sole consideration for the purchase for cancellation and/or redemption of these shares, Farmco 2 will issue Promissory Note 5 to Holdco A which will have a principal amount and FMV equal to the aggregate FMV of its XXXXXXXXXX Class C common shares purchased for cancellation and XXXXXXXXXX Class D preferred shares so redeemed and Holdco A will accept Promissory Note 5 as payment in full for such purchase for cancellation and share redemption.

28. Farmco 2 will purchase for cancellation the XXXXXXXXXX Class C common shares and redeem the XXXXXXXXXX Class D preferred shares of Farmco 2 that were transferred to Holdco B as described in Paragraphs 18 and 21, for an amount equal to their aggregate FMV and/or redemption amount, as the case may be. As sole consideration for the purchase for cancellation and/or redemption of these shares, Farmco 2 will issue Promissory Note 6 to Holdco B which will have a principal amount and FMV equal to the aggregate FMV of its XXXXXXXXXX Class C common shares purchased for cancellation and the XXXXXXXXXX Class D preferred shares so redeemed and Holdco B will accept Promissory Note 6 as payment in full for such purchase for cancellation and share redemption.

29. Holdco A will redeem the XXXXXXXXXX Class G-3 preferred shares it issued to Farmco 2 as described in Paragraph 17, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Holdco A will issue Promissory Note 7 to Farmco 2 which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the XXXXXXXXXX Class G-3 preferred shares so redeemed. Farmco 2 will accept Promissory Note 7 as payment in full for the preferred shares so redeemed.

30. Holdco B will redeem the XXXXXXXXXX Class G-3 preferred shares it issued to Farmco 2 as described in Paragraph 19, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Holdco B will issue Promissory Note 8 to Farmco 2 which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the XXXXXXXXXX Class G-3 preferred share so redeemed. Farmco 2 will accept Promissory Note 8 as payment in full for the preferred shares so redeemed.

Set-off of Notes

31. Immediately following the transactions described in Paragraphs 23 to 30, the following notes will be offset against one another and reduce the balances payable as follows:

• Promissory Note 1 will be offset as partial payment against Promissory Note 3.
• Promissory Note 2 will be offset as partial payment against Promissory Note 4.
• Promissory Note 7 will be offset as partial payment against Promissory Note 5.
• Promissory Note 8 will be offset as partial payment against Promissory Note 6.

Second set of Share/Property Transfers

32. Parent A and Parent B will each transfer XXXXXXXXXX Class F preferred shares of Farmco 1 to Holdco 1. As sole consideration for each such transfer, Parent A and Parent B, as the case may be, will each receive XXXXXXXXXX Class E voting preferred shares of Holdco 1, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in aggregate, having an aggregate FMV equal to the FMV of their XXXXXXXXXX Class F preferred shares of Farmco 1 so transferred.

Each of Parent A, Parent B and Holdco 1 will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to their respective share transfers. For greater certainty, the agreed amount for each share transfer by Parent A and Parent B, as the case may be, will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital account of the XXXXXXXXXX Class E voting preferred shares of Holdco 1 issued to each of Parent A and Parent B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the XXXXXXXXXX Class F preferred shares of Farmco 1 so transferred to Holdco 1; and (ii) the aggregate ACB to Parent A or Parent B, as the case may be, immediately before the share transfers, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

33. Farmco 1 will redeem its XXXXXXXXXX Class F preferred shares acquired by Holdco 1 as described in Paragraph 32, for an amount equal to their aggregate redemption amount and FMV. As sole consideration for the redemption of these shares, Farmco 1 will issue a non-interest bearing demand promissory note to Holdco 1 which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the XXXXXXXXXX Class F preferred shares so redeemed. Holdco 1 will accept the promissory note as payment in full for the preferred shares so redeemed.

34. Holdco B will transfer its partnership interest in Farm Partnership to Childco 2. As consideration for the transfer, Holdco B will receive a non-interest bearing demand promissory note from Childco 2 having a principal amount and FMV of $XXXXXXXXXX and XXXXXXXXXX Class G non-voting preferred shares of Childco 2, redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate. For greater certainty, the consideration received by Holdco B from Childco 2 will have an aggregate FMV equal to the FMV of the partnership interest in Farm Partnership so transferred.

Holdco B and Childco 2 will jointly elect, pursuant to subsection 85(6), for subsection 85(1) to apply to the transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class G preferred shares of Childco 2 so issued to Holdco B will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

35. Holdco A will transfer its partnership interest in Farm Partnership to Childco 1. As consideration for the transfer, Holdco A will receive a non-interest bearing demand promissory note from Childco 1 having a principal amount and FMV of $XXXXXXXXXX and XXXXXXXXXX Class H2 non-voting preferred shares of Childco 1 redeemable at $XXXXXXXXXX per share or $XXXXXXXXXX in aggregate. For greater certainty, the consideration received by Holdco A from Childco 1 will have an aggregate FMV equal to the FMV of the partnership interest in Farm Partnership so transferred.

Holdco A and Childco 1 will jointly elect, pursuant to subsection 85(6), to have the rules in subsection 85(1) apply to the transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class H2 preferred shares of Childco 1 issued to Holdco A will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

36. Farmco 2 will transfer its partnership interest in Farm Partnership to Childco 3. As consideration for the transfer, Farmco 2 will receive a non-interest bearing demand promissory note from Childco 3 having a principal amount and FMV of $XXXXXXXXXX and XXXXXXXXXX Class E non-voting preferred shares of Childco 3 redeemable at $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate. For greater certainty, the consideration received by Farmco 2 from Childco 3 will have an aggregate FMV equal to the FMV of the partnership interest in Farm Partnership so transferred.

Farmco 2 and Childco 3 will jointly elect, pursuant to subsection 85(6), to have the rules in subsection 85(1) apply to the transfer. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The amount added to the stated capital in respect of the XXXXXXXXXX Class E preferred shares of Childco 3 issued to Farmco 2 will not exceed the maximum amount permitted to be added to the PUC of the shares, having regard to subsection 85(2.1).

37. Farmco 1 will transfer its partnership interest in Farm Partnership to Childco 3 on a taxable basis at its FMV. As sole consideration for the transfer, Farmco 1 will receive a non-interest bearing demand promissory note from Childco 3 having a principal amount and FMV of $XXXXXXXXXX, which, for greater certainty, will equal to the FMV of the partnership interest in Farm Partnership so transferred.

Amalgamation

38. Effective XXXXXXXXXX, Farmco 1 and Farmco 2 will amalgamate pursuant to XXXXXXXXXX of the BCA, in such a manner that such amalgamation will be a qualifying amalgamation for the purposes of subsections 87(1). The amalgamated corporation will retain the name Farmco 1.

ADDITIONAL INFORMATION

39. The Proposed Transactions described herein will occur in the order presented, with the exception of the filing of the applicable election forms described in Paragraphs 14 through to 22, Paragraphs 32 and 34 through to 36, which will be filed by the applicable due date following completion of the Proposed Transactions or unless otherwise indicated in Paragraphs 41, 42 and 43.

40. Other than as described herein, there are no transactions that have been completed prior to the date of this letter nor are there any other transactions that are currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

41. The share and property transfers described in Paragraphs 13 to 22 will all occur contemporaneously with each other.

42. The redemptions and purchases for cancellation described in Paragraphs 23 to 30 will occur contemporaneously with each other but after the transactions referred to in Paragraph 41. The set off of the various notes described in Paragraph 31 will occur contemporaneously with each other but after the transactions described in Paragraphs 23 to 30.

43. The share and property transfers described in Paragraphs 32 to 37 will occur contemporaneously with each other but after transactions referred to in Paragraph 42.

44. None of the shares described in this letter will be at any time during the series of events or transactions that includes the Proposed Transactions:

a. the subject of any undertaking or agreement that is a “guarantee agreement” within the meaning referred to in subsection 112(2.2);

b. the subject of a “dividend rental arrangement” referred to in subsection 112(2.3) as that term is defined in subsection 248(1);

c. the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

d. issued for consideration that is or includes an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

e. issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

45. None of the shares described in this letter will be at any time during the series of events or transactions that includes the Proposed Transactions, a restricted financial institution, a specified financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of financial intermediary corporation in subsection 191(1).

46. As part of the series of transactions or events that includes any of the Proposed Transactions, there will not be:

a. a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or

b. a significant increase described in subparagraphs 55(3)(a)(ii) or (v).

PURPOSES OF THE PROPOSED TRANSACTIONS

The overall purpose of the Proposed Transactions is to separate and divide the ownership interest in certain assets used in the farming business carried on by Farm Partnership (including the partnership interest in Farm Partnership) that are held in various corporations that Parent A and Parent B directly or indirectly control, proportionally amongst corporations owned by their adult children. This will facilitate the estate and business planning objectives of Parent A and Parent B and those of their children. Parent A and Parent B will continue to maintain their respective economic interests in such property (via preferred shares) and the non-farming assets held by the various corporations they directly or indirectly control.

The purpose of the step described in Paragraph 13 is to freeze most of the value of Parent A’s and Parent B’s shareholdings in Farmco 1.

The purpose of the step described in Paragraph 14 is to create Holdco A’s ownership interest in Farmco 1 which is necessary to offset the cross ownership of Farmco 1 in Holdco A that will result from the shares issued in the step provided in Paragraph 16.

The purpose of the step described in Paragraph 15 is to create Holdco B’s ownership interest in Farmco 1 which is necessary to offset the cross ownership of Farmco 1 in Holdco B that will result from the shares issued in the step provided in Paragraph 18.

The purpose of the step described in Paragraph 16 is to transfer a portion of Farmco 1’s assets to Holdco A, in which Childco 1 will acquire a share ownership interest, as described in Paragraph 20.

The purpose of the step described in Paragraph 17 is to transfer a portion of Farmco 2’s partnership interest in Farm Partnership to Holdco A to ensure that the appropriate partnership interest in Farm Partnership is transferred to Childco 1 as described in Paragraph 35.

The purpose of the step described in Paragraph 18 is to transfer a portion of Farmco 1’s assets to Holdco B, in which Childco 2 will acquire a share ownership interest, as described in Paragraph 21.

The purpose of the step described in Paragraph 19 is to transfer a portion of Farmco 2’s partnership interest in Farm Partnership to Holdco B to ensure that the appropriate partnership interest in Farm Partnership is transferred to Childco 2 as provided in Paragraph 34.

The purpose of the step described in Paragraph 20 is to increase Holdco A’s ownership interest in Farmco 2 and to ensure that Childco 1 has a share ownership interest in Holdco A.

The purpose of the step described in Paragraph 21 is to increase Holdco B’s ownership interest in Farmco 2 and to ensure that Childco 2 has a share ownership interest in Holdco B.

The purpose of the step described in Paragraph 22 is to increase Farmco 1’s ownership interest in Farmco 2 and ensure that Childco 3 has a share ownership interest in Farmco 1.

The purpose of the step described in Paragraph 32, in conjunction with the step described in Paragraph 33, is to ensure that Parent A and Parent B are able to extract their FMV from Farmco 1, in the form of a non-interest bearing demand promissory note payable to Holdco 1, at a point in time subsequent to Childco 3 acquiring an ownership interest in Farmco 1.

The purpose of the steps described in Paragraphs 34 through to 37, is to transfer the partnership interests in Farmco 2 such that Childco 2, Childco 1 and Childco 3 share the ownership in Farm Partnership, and to ensure that Farmco 1, Farmco 2, Holdco A and Holdco B have a share ownership in each of Childco 2, Childco 1 and Childco 3.

RULINGS GIVEN

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, additional information, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. The provisions of subsection 51(1) will apply to the exchange of Parent A’s XXXXXXXXXX Class B common shares of Farmco 1 for XXXXXXXXXX Class F preferred shares of Farmco 1 and to the exchange of Parent B’s XXXXXXXXXX Class A common shares of Farmco 1 for XXXXXXXXXX Class F preferred shares of Farmco 1, as described in Paragraph 13.

B. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), subsection 85(1) will apply to the transfers of the particular property described in Paragraphs 13 to 22, Paragraph 32 and Paragraphs 34 to 36, such that the agreed amount in respect of the particular property so transferred will be deemed to be the particular transferor’s proceeds of disposition and particular transferee’s cost of such property pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to any of these transfers.

C. Subsection 84(3) will apply to the transactions described in Paragraphs 23 to 30 and in Paragraph 33 such that the particular corporation redeeming, acquiring or purchasing its shares for cancellation, as the case may be, will be deemed to have paid, and the corporation that owned such shares will be deemed to have received, a dividend on such shares equal to the amount paid by the corporation on such redemption, acquisition or purchase for cancellation, as the case may be, exceeds the PUC in respect of those particular shares immediately before that time.

D. Each of dividends described in Ruling C above will be a taxable dividend that:

a. will be included in computing the income of the corporation deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);

b. will be deductible by the recipient corporation pursuant to subsection 112(1) in computing its taxable income for the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

c. will be excluded in determining the recipient’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;

d. will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

e. will not be subject to tax under Part IV.1 or Part VI.1; and

f. will not be subject to tax under Part IV, except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend as provided under paragraph 186(1)(b).

E. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to any of the taxable dividends referred to in Rulings C and D, provided that as part of a series of transactions or events that includes any of the Proposed Transactions, there is no disposition or significant increase in interest as described in any of subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or significant increase in interest described in subparagraphs 55(3)(a)(i) to (v).

F. Subsections 15(1), 56(2) and 246(1), in and of themselves, will not apply to the Proposed Transactions.

G. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided therein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the PUC of any share or the ACB or FMV of any share or property referred to herein;

(b) the balance of the CDA, GRIP, or RDTOH of any corporation, including any ERDTOH or NERDTOH balances;

(c) whether any of the shares described herein constitute shares of a specified class; or

(d) any other tax consequence relating to the facts, additional information, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter;

(e) To the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation its shares, a problem of circularity may possibly arise when computing the Part IV tax and the dividend refund of each corporation. We do not provide any comments on that possible issue.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch